Bankruptcy limits

As the wave of carriers spending time in bankruptcy protection shows no sign of abating, it opens up a number of key issues as to the limits of bankruptcy law when it conflicts with other legislation. Should the refuge provided by court supervision allow debtors to play by a different set of rules?

Bankruptcy is now commonplace in the airline business. Court-supervised reorganisation is seen as a refuge and a way to recover. Without it, many carriers operating today would have disappeared for good.

But it brings fresh challenges. This reorganisation boom has spawned issues such as the relationship between bankruptcy protection and the rights of creditors and employees, or the effect of other laws. Conflict is inevitable when an airline sees bankruptcy as a protective shield and others see it as something less.

Key issues remain unsettled in the USA, and are just now coming to a head. The most burning being the limits of the power of bankruptcy law when it conflicts with other civil laws. The untested issue is can the bankruptcy statutes trump other laws, in particular labour law? Some courts have accepted the airline industry’s brief that, yes it does, that the reorganising airline is indeed insulated against an otherwise (likely) legal job action, while in another case, judges held that unions could strike.

Ironically, one is Northwest Airlines, which sought protection in September 2005, while the other is Northwest Airlink regional Mesaba Aviation, a separate feeder that went into bankruptcy court a month later. The ruling that unions could not strike at Northwest conflicts with a ruling that unions could strike at its feeder. This much-debated and unsettled area of law may go to the nation’s highest court.

Another unsettled issue is how much an airline remains subject to government regulation while in bankruptcy. No one suggests any airline can ignore safety regulations. But during Air Canada’s reorganisation, the question arose: was the airline still subject to requirements for bilingual announcements in airports and in-flight? Could Canada’s competition tribunal continue with a case that started before the bankruptcy filing? Both questions pose the issue of how far bankruptcy protection goes.

This question is now at the centre of a storm in Varig’s reorganisation, as conflict erupts between a Rio de Janeiro bankruptcy court and Brazil’s civil aviation agency, ANAC. In bankruptcy, Varig’s fleet has shrunk from 70 jets to a low of 10 in July. Latest figures show Varig’s domestic market share plunging to 2% and even on international routes Varig’s share is down to 22%. This is apparent in airports throughout Brazil, where Varig check-in counters and gates are quiet, while chaos reigns in the crammed terminal areas of its rapidly rising rivals, TAM and GOL.

Varig plans to restore some routes by year-end, but that is longer than Brazil’s dormancy rules allow. ANAC, though, decided not to question these plans. On routes where Varig has no plan for resumption, however, ANAC began to reassign routes, and under-used airport space. The bankruptcy court responded, ordering ANAC to stop redistributing Varig’s assets. ANAC replied that it was not subject to the court’s orders, and continued until the court began levying fines on ANAC officials.

The impasse created much confusion. Airlines that had been assigned routes did not know if they were permitted to fly them. The uncertainty caused GOL to suspend a public offering.

ANAC insists it has a mandate to regulate civil aviation and says overcrowded terminals and dormant routes are not good for the country. It says its job is to do what is best for consumers and civil aviation, not to protect a debtor airline. The dispute became serious enough to attract the attention of Brazil’s President Lula, who urged ANAC and the court to find a swift resolution. That appeared to arrive in late September, when Brazil’s Superior Court intervened to confirm ANAC’s position.

The argument seems compelling in this context: bankruptcy does not stop a government agency using its regulatory powers. An airline in reorganisation still must comply with all laws. As one authority puts it, bankruptcy reorganisation “provides no justification for allowing the debtor to play by a different set of rules”.

The larger issues, though, remain open to debate. Can unions strike at a bankruptcy airline if that job action would undoubtedly doom an airline that is protected from many outside forces? Or do the unions lose a civil right, their right to strike, because they happen to work for an airline that is in bankruptcy? Universal agreement on this would end some troubling disputes about the limits of bankruptcy. ■

Source: Airline Business